What factors affect your credit score?

What is your credit score? 

Your credit score is a number that represents the risk you pose to lenders when you borrow money. The higher your score, the better. A good credit score will make it easier to borrow money at competitive interest rates. 

A number of elements feed into your credit score. Your payment history on debts and other credit agreements is arguably the most important; but your salary and how much money you have in savings don’t matter at all.   

What affects your credit score? 

Does paying Direct Debits build credit? 

Making payments on time will improve your credit score – and Direct Debits are a good way to ensure you don’t miss payments.  

Paying debt payments such as mortgages, credit cards and loans on time will boost your score. The same goes for credit agreements such as your mobile phone, energy, and broadband.   

Rent payments only affect your credit score if these are reported to credit reference agencies – most private landlords don’t do this. You can use rent reporting tools to make sure your rent payments contribute to your credit score. 

Does being on the electoral roll affect my credit score? 

Being registered to vote at your current address has a positive effect on your credit score.  

This is because the electoral register is used by both credit reference agencies and lenders to check your identity.  

Does moving house affect your credit score?  

Lenders look for signs that borrowers are reliable and ‘stable’. Staying at one address suggests your circumstances are reasonably stable – so try not to move home too often.  

Getting a landline phone number and sticking with the same bank also indicate stability. 

Will having a joint account affect my credit score? 

If you have a joint credit agreement – such as a mortgage or loan – the other person’s credit score will affect yours. This is called a ‘financial association’. 

Contrary to popular belief, you won’t create a financial association by sharing an address with someone, or even marrying them. Opening a joint account or taking out a joint credit agreement (i.e. a joint loan) creates the financial association. 

Why is my credit score bad? 

Being close to your credit limit on existing lines of revolving credit (such as credit cards) will cause your score to fall.  

Your ‘credit utilisation’ ratio is the percentage of your available credit you are currently using. For example, if you have an authorised overdraft of £1,000 and are £400 in the red, your credit utilisation will be 40%.  

It’s best to keep this ratio low. Experts suggest aiming for a maximum of 25% or 30% credit utilisation across all your accounts. 

What impacts your credit score? 

A mix of various forms of credit, such as overdrafts, credit cards and loans, will be better for your score than sticking to just one type of borrowing. 

If you have never borrowed money, you will have a ‘thin’ credit file. This could cause you to have a low credit score. You can boost your score by taking out a credit card, and paying the bill in full each month, or paying for home or car insurance monthly (this is a type of credit agreement).  

Will Klarna affect my credit score? 

Buy Now Pay Later (BNPL) payment schemes such as Klarna and Clearpay are a type of borrowing. These schemes allow you to make a purchase and pay for it in interest-free instalments. 

BNPL can affect your credit score. BNPL payment information is a relatively new entry on UK credit reports. Missed payments and debt recovery action will have a negative impact on your credit score. 

Do loans affect your credit score? 

Yes, making loan applications will affect your score. This is because each time you apply for finance, the lender will run a ‘hard’ credit check on your credit report. This can cause a temporary dip in your score and leave a footprint behind for other lenders to see.